The last plate established the discount — that the future is valued below the present — and deferred its cause to two answers, impatience and productivity. This plate takes up the first: impatience, the preference for the present, the reason we will not, after all, simply wait. For if we were perfectly patient — indifferent between a good now and the same good later — we should lend at no interest, merely to smooth our consumption across the years, and the demand-side pressure upon the rate would vanish altogether. But we are not patient; we will not simply wait; and the question of why we will not is the whole of this plate. It will follow Böhm-Bawerk, who set down the classic reasons, and Fisher, who made impatience the very heart of his theory of interest; and it will find that our refusal to wait is partly wise and partly a weakness — that some of the premium we set upon the present is the rational price of a mortal and uncertain life, and some of it mere myopia, a failure to see the future plain — and that the difference between the two is, once again, the difference between an interest that is earned and one that is extracted.
Begin with the puzzle in its starkest form. A good now, or the very same good in a year: why should we not be wholly indifferent? The good is the same; if we could but wait, and wait at no cost, then a measure of pleasure deferred would be a measure of pleasure still, and no one need be paid a farthing to defer it. The premium on the present — the discount on the future — exists only because we will not simply wait, because the deferral of satisfaction is, to us, a real and felt cost. This refusal is what the economists call time preference: the preference for present over future satisfaction, the subjective rate at which we mark down the good things of tomorrow against the good things of today. It is the one of the two springs of interest that rises on the side of demand — the force that makes us impatient to have now, and so willing to pay, in interest, for the means of having now, or to demand interest before we will consent to wait. The question this plate must answer is what that impatience is for — why we refuse to wait — and the answer, it will prove, is not one answer but several.
The classic answer came from Eugen von Böhm-Bawerk, who set down the reasons that present goods are worth more than future ones. He gave three, though only two belong to this plate, the third being the matter of the next. The first reason is one of circumstance: we commonly expect to be better provided for in the future than in the present — richer, or at the least no poorer — and a good is worth more to us when we have little than when we have much, so that a good in our present relative want outweighs the same good in our expected future plenty. This reason is sound, and it cuts both ways: a man who expects to be poorer later, in his old age, ought to value future goods the more, and save against the lean years, his time preference running backward. The second reason is one of psychology, and it is darker: that we systematically underestimate our future wants — that through some failure of imagination, some weakness of the will, some inability to feel tomorrow's hunger in today's belly, we picture our future needs more dimly than our present ones, and so undervalue them. The first reason is rational, a clear-eyed response to changing circumstance; the second is a defect, a flaw in the inner eye. And the premium we set upon the present is compounded of the two together.
The first reason is a clear-eyed response to changing circumstance; the second a flaw in the inner eye; and the premium we set upon the present is compounded of the two together.
What Böhm-Bawerk set out in reasons, Irving Fisher built into a theory, and gave the thing its lasting name: impatience. Fisher's great book on interest was subtitled for its two forces — impatience to spend income, and opportunity to invest it — and impatience was the demand side, the time preference of the one who must choose. Fisher anatomized what makes a person more impatient or less: the objective shape of his income, whether it rises or falls across his life, how large it is and how certain; and the subjective cast of his character, his foresight or his shortsightedness, his self-command or the want of it, his expectation of life, his care or his indifference for those who come after him. A man whose income will rise is impatient now, being poor now and rich to come; a man facing an uncertain future discounts it the more steeply; a man of little foresight or feeble will discounts it more steeply still. And Fisher showed how this impatience meets its match: the rate of interest settles where the impatience of the one who would borrow and the opportunity of the one who would invest are brought into balance, so that, at the margin, every person's rate of time preference is drawn into line with the single market rate. Impatience sets the demand and opportunity the supply, and the rate is struck where they meet — but the meeting is the next plate's business, and this one's is the impatience alone.
How much of our impatience is wise? A part of it, certainly, and an irreducible part. For we are mortal, and we do not know the hour; the future good is a good we may not live to enjoy, and to discount it for that risk is not myopia but clear sight. The bird in the bush may fly; the promised future may not arrive; the borrower may die, the debtor default, the world be overturned. A reasonable being, facing a future genuinely uncertain and genuinely finite, will value a sure present good above an unsure future one, and the premium it sets upon the present is the fair price of that uncertainty and that mortality. To this must be joined Böhm-Bawerk's first ground, the rational regard for expected plenty: one who will be richer hereafter does well to weight the present's relative scarcity more. So there is a core of impatience entirely defensible — the discount a clear-eyed, mortal, uncertain creature rightly lays upon a future it may not see and may not need; the very sacrifice that an older economics called abstinence, and held the proper ground of interest. This core is the part of time preference for which interest is the just and earned reward: the genuine cost of asking another to wait, in a world where waiting is itself a risk.
But not all of our impatience is wise, and the part that is not has troubled the moralists of the science from the first. For beyond the rational discount — beyond what mortality and uncertainty and expected plenty can justify — there remains a residue of pure impatience: the discounting of the future merely because it is the future, the marking-down of a tomorrow we shall assuredly see and assuredly need. Pigou named it exactly — a defective telescopic faculty, by which we see future pleasures on a diminished scale, as though through the wrong end of the glass, not because they are smaller but because our sight of them is weak. Ramsey, weighing the saving a nation owes its heirs, called the pure discounting of the generations to come a thing ethically indefensible, arising "merely from the weakness of the imagination." And the modern students of the mind have sharpened the charge: that our impatience is not even a steady thing but a treacherous one, far fiercer for the near term than the far, so that we forever resolve to save and to diet and to study tomorrow, and forever yield today — the time-inconsistent, self-defeating impatience that treats our own future self as a stranger whose interests we are content to sacrifice. This residue is no rational price but a flaw; and where interest is the wage of the flaw — where the lender's gain is the borrower's myopia, the profit wrung from a weakness of will — the price of time begins to slide from the earned toward the extracted.
Where the lender's gain is the borrower's myopia, the profit wrung from a weakness of will, the price of time begins to slide from the earned toward the extracted.
And there is a third refusal to wait, neither wise nor foolish but forced, which the tidy division into reason and defect is apt to overlook: the impatience of necessity. The poor man at the edge of survival does not discount the future from a failure of imagination; he discounts it because he must eat today to be alive tomorrow, because the rent falls due now and the child is hungry now, because the luxury of waiting belongs to those who have enough to wait with. His high preference for the present is neither a clear-eyed wager against mortality nor a myopic flaw but the plain arithmetic of want — the time preference of those held at subsistence, who cannot defer because deferral is a thing the comfortable can afford and the desperate cannot. And here is the cruelest turn of the whole matter: that it is exactly these, the ones who cannot wait because they have nothing, who are charged the steepest price for not waiting — the payday loan, the pawnshop, the rate that mounts to the hundreds in the hundred, levied upon the very people least able to bear it. The impatience of necessity is no defect to be corrected nor a risk to be fairly priced; it is a need to be relieved, and the interest that feeds upon it is the least earned of all.
So the demand side of the discount is impatience, the refusal to wait, and the refusal is of three kinds tangled into one. We will not wait because we may not live to collect, because the future is uncertain, because we expect to be richer and rightly weight the present's want the more — and this is the wise refusal, for which the interest that rewards waiting is honestly earned. We will not wait because we cannot see our own future plainly, because the will is weak and the imagination dim and the tomorrow-self a stranger we are glad to rob — and this is the foolish refusal, for which interest is less a wage than a levy upon a flaw. And we will not wait because we cannot, being too poor to defer at all — and this is the forced refusal, for which interest is neither wage nor levy but something nearer a toll upon distress. The market reads off a single rate, compounded of wisdom and weakness and want in proportions no one can cleanly part; and that is why the price of time has always been morally fraught, and why the long war over usury, which a later plate must fight, is at bottom a war over which of these three impatiences the lender is being paid for. When interest rewards the wise refusal it is earned; when it feeds upon the foolish or the forced it is extracted; and no single number will ever tell us, of itself, which it is. As the table says of every price within it, the argument remains open.